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Uncertainty Breeds Decreasing Impatience: The Role of Risk Preferences in Time Discounting

University of Zurich, Institute for Empirical Research in Economics Working Paper No. 412

43 Pages Posted: 9 Jun 2009  

Thomas Epper

University of St. Gallen, School of Economics and Political Science; University of Zurich, Department of Economics

Helga Fehr-Duda

ETH Zürich - Center for Economic Research

Adrian Bruhin

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Date Written: May 18, 2009

Abstract

Future events are uncertain by their very nature. Therefore, people's risk preferences are likely to play a role in the valuation of allegedly guaranteed future outcomes. We show that future uncertainty conjointly with people's proneness to nonlinear probability weighting generates a unifying framework for explaining many anomalies in intertemporal choice, such as hyperbolic discounting and subadditivity of discount factors. Moreover, our approach implies that higher uncertainty of future prospects increases the hyperbolicity of discount rates, suggesting that institutional deficiencies such as lack of contract enforcement, may be a source of hyperbolic discounting behavior. Based on an experiment with monetary incentives, we show that people's risk taking behavior is indeed a significant determinant of their time discounting behavior: Greater departures from linear probability weighting predict a stronger decline in impatience on the level of individual behavior.

Keywords: institutionally generated uncertainty, time preferences, risk preferences, hyperbolic discounting, probability weighting

JEL Classification: D01, D81, D91

Suggested Citation

Epper, Thomas and Fehr-Duda, Helga and Bruhin, Adrian, Uncertainty Breeds Decreasing Impatience: The Role of Risk Preferences in Time Discounting (May 18, 2009). University of Zurich, Institute for Empirical Research in Economics Working Paper No. 412. Available at SSRN: https://ssrn.com/abstract=1416007 or http://dx.doi.org/10.2139/ssrn.1416007

Thomas Epper (Contact Author)

University of St. Gallen, School of Economics and Political Science ( email )

Varnbüelstrasse 19
St. Gallen, SG 9000
Switzerland

HOME PAGE: http://www.thomasepper.com

University of Zurich, Department of Economics ( email )

Blüemlisalpstrasse 10
Zuerich, 8006
Switzerland

Helga Fehr-Duda

ETH Zürich - Center for Economic Research ( email )

Weinbergstr. 35
Zurich 8092
Switzerland

Adrian Bruhin

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

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